Andrew Sorkin - Too Big to Fail - The Inside Story of How Wall Street and Washington Fought to Save the FinancialSystem--and Themselves

“It’s ridiculous that I can’t deal with Goldman at a time like this!” Paulson complained to his general counsel, Bob Hoyt. He was supposed to take part in a 3:00 p.m. call with Bernanke, Geithner, and Cox to discuss Goldman Sachs and Morgan Stanley, but unless he could get a waiver, he would be unable to participate.

With Morgan Stanley on the ropes, Paulson had been growing increasingly worried about Goldman, and if Goldman were to topple, it would, he believed, represent a complete destruction of the system. He’d had enough of recusing himself. Part of him regretted signing the original ethics letter agreeing not to get involved in any matter related to Goldman for his entire tenure. At the time it had seemed a good-faith gesture to go above and beyond the typical one-year moratorium on dealing with former employers, but now, he thought, it had come back to bite him.

Geithner had raised this very issue back in March after the Bear Stearns deal. “You know, Hank, if another one of these banks goes,” he said, “I don’t know who would have the ability to take them over other than Goldman, and we have to do something about your waiver-recusal situation because I don’t know how we can do one of these without you.”

Given the extreme situation in the market, Hoyt told Paulson he thought it was only fair that he try to seek a waiver; Hoyt had, in fact, already even drafted the material needed to request one. As Paulson had sold all of his Goldman stock before he took office, Hoyt thought he could easily tell the Office of Government Ethics that Paulson had no conflict, apart from his remaining stake in Goldman’s pension plan, but that constituted only a small part of his overall wealth. After he turned sixty-five years old, Goldman would pay him $10,533 a year.

Paulson appreciated that the “optics” of receiving a waiver to engage with his former employer would only feed the continuing conspiracy theories about his efforts to help Goldman, but he felt he had no other choice. And he hoped it would remain a secret: He and Hoyt discussed keeping the existence of a waiver confidential.

Hoyt reached out to Fred F. Fielding, counsel to the White House and a longtime Washington hand who knew his way around the system, and to Bernard J. Knight Jr., the DAEO, or designated agency ethics official, at Treasury, who was attending a conference in Florida with another colleague from the White House ethics office. With virtually no pushback, given the gravity of the situation, they quickly accepted Hoyt’s recommendation.

“I have determined that the magnitude of the government’s interest in your participation in matters that might affect or involve Goldman Sachs clearly outweighs the concern that your participation may cause a reasonable person to question the integrity of the government’s programs and operations,” Knight wrote in an e-mail.

Fielding’s office made it official by having a copy of the formal waiver walked over to the Treasury Building. On White House letterhead, it began, “This memorandum provides a waiver… .

In your position as Secretary of the United States Department of the Treasury, you are responsible for serving the American people and strengthening national security by managing the U.S. Government’s finances effectively, promoting economic growth and stability, and ensuring the safety, soundness, and security of the United States and international financial systems.

You currently have an interest in a defined benefit pension plan through your former employers, the Goldman Sachs Group, Inc. Your total investment in this plan represents only a small fraction of your overall investment portfolio. For this reason, your financial interest in the plan is not so substantial as to be likely to affect the integrity of your services to the Government. With this waiver, you may participate personally and substantially in the particular matters affecting this defined benefit pension plan, including the ability or willingness of the Goldman Sachs Group, Inc. to honor its obligations to you under this plan.

Unknown to the public, Paulson was now officially free to help Goldman Sachs.

“Stop the insanity—we need a time out” was the subject line of Glenn Schorr’s e-mail. An analyst at UBS who covered the banking industry, Schorr had sent the missive to accompany his latest report to his clients on Wednesday afternoon. But by the time the market closed—with Morgan Stanley’s shares plummeting 24 percent, to $21.75, after dropping to $16.08 earlier in the day, and Goldman plunging 14 percent, to $114.50, after hitting a low of $97.78—Schorr’s e-mail was being forwarded all around town.

“We think investors should be focused on risk management and performance and not just whether you have retail deposits (banks go out of business, too, last we checked—and at this rate, following money fund redemptions, deposits could be around the corner). In our view, a lack of confidence and forced consolidation into firms that are ‘too big to fail’ can’t be the final solution,” he wrote. “The world should really be concerned about this because if we continue to squeeze the financial system’s balance sheet and see fewer players in the business, the available credit to corporations and hedge funds will shrivel up and the cost of capital will continue to skyrocket across the board.”

The e-mail eventually found its way to the Treasury Building, where Paulson was returning phone calls from a long list, trying to get a realistic view of what was taking place on Wall Street. Among the people he spoke with was Steve Schwarzman, the chairman of Blackstone Group, the private-equity giant.

“Hank, how’s your day going?” Schwarzman jibed when the call was connected.

“Not well. What do you see out there?” Paulson asked.

The conversation quickly turned serious. “I have to tell you, the system’s going to collapse in the next few days. I doubt you’re going to be able to open the banks on Monday,” Schwarzman said, deeply spooked by what he was seeing.

“People are shorting financial institutions, they’re withdrawing money from brokerage firms because they don’t want to be the last people in—like in Lehman—which is going to lead to the collapse of Goldman and Morgan Stanley. Everybody is just pursuing his self-interest,” Schwarzman told him. “You have to do something.”

“We’re working on some things,” Paulson said. “What do you think we should do?”

“You have to approach what you’re doing from the perspective of being a sheriff in a western town where things are out of control,” Schwarzman replied, “and you have to do the equivalent of just walking onto Main Street and shooting your gun up in the air a few times to establish that you’re in charge because right now no one is in charge!”

Paulson just listened, trying to picture himself in that role. “What do you recommend?”

“Well, the first thing you could do is stop short-selling of financial institutions—forget whether it’s effective in removing the pressure, although it might be. What will be accomplished is that you will scare the participants in the market, and they will recognize that things are going to change and they can’t continue to invest in the exact same way, and that will force people to pause,” Schwarzman said.

“Okay. That’s not a bad idea,” Paulson agreed. “We’ve been talking about that. I could do that. What else do you got?”